Take one company, three children of the owner who work there, and a founder who is almost ready to let go. Then see if even the most carefully planned of successions -- a couple of false starts notwithstanding -- will fly

It is March 1990, and two women meet for dinner at Eulipia, a trendy downtown San Jose restaurant. The older of the two is the owner and chief executive of Capsco Sales Inc., a $10.7-million electronic-components company just beginning to recover from four years of sheer hell. There has been a computer-system failure, a messy divorce, a banking catastrophe, and a major industry shake-up. But Capsco's luck has taken a turn. The CEO's dinner companion, a promising young manager who left the company in 1987, has indicated that, under the right circumstances, she would consider coming back. The CEO offers the woman her old job as operations manager. No deal, the younger woman replies. She goes on to negotiate a more impressive title -- director of new-business development -- more responsibility, and a better salary. The CEO is impressed with this tenacity, and as she raises her glass to toast the renewed business relationship, the young woman confesses that, in fact, she has already quit her previous job. The CEO breathes a sigh of relief. Not only has she rehired a top manager, she has regained her successor.

"She wasn't just my daughter," says Billye Ericksen, the CEO, as she looks back on that evening in 1990. "I respected her. She was ready." It was Billye's second chance, probably her last chance, to make succession work.

Today 36-year-old Kathy Ericksen sits behind what was her mother's desk, running a company whose continued existence is nothing short of extraordinary. As the newly appointed president and chief operating officer of Capsco, based in Sunnyvale, Calif., Kathy counts among those who report to her her two brothers, Ken (vice-president of sales and marketing) and Kirk (head of the Pacific Northwest division, in Redmond, Wash.), and her mother (chairman of the board and de facto administrative assistant to the president). Like her mother, Kathy exudes confidence and self-control. But comfortable as she may seem, Kathy doesn't kid herself that the transition will be smooth going. Why should it be? The road to the president's office was fraught with potholes and detours. Indeed, it was a journey that began eight years ago.

* * *

Billye Ericksen's strong suit has always been the speed with which she makes decisions and translates them into action. "I'm the 'learn it by 9, apply it by noon' lady," she jokes. That was the case with her first succession plan, conceived in 1985 on a flight home from Hawaii. Ken, Kathy, and Kirk -- then 29, 27, and 25 respectively -- had been working with Billye at Capsco for several years, and while she always assumed they would one day take over the business, she had done very little to prepare them for the responsibility. A carefully chosen outside board of directors, Billye reckoned, could help give her children the management and industry experience they lacked.

Over the next year and a half, she signed on three respected Silicon Valley executives -- John DeSantis, director of manufacturing at Capetronic Inc.; Jan Blakslee, director of human resources at Spectra

Physics; and Bill Flanagan, operations vice-president at Amdahl Corp. In 1988 they would be joined by Gwen Peterson, vice-president of marketing at Clarity Software. The board members' primary mission would be to mentor Ken, Kathy, and Kirk (see "The Family Plan," April 1986) by bringing them into their respective companies for a bit of accelerated hands-on management training. Then, Billye declared, by 1988 she would name her successor, retire, and sell the company to her children through a leveraged buyout.

The plan, a perfect reflection of Billye's proclivity for immediate action (some might call it impatience), "was more of a dream than a vision," says board member Blakslee, now president of his own executive-search firm. "Ken, Kathy, and Kirk did not have the breadth of exposure, living in their mother's shadow, to assume the roles that needed to be played. At that point, they were carrying out orders. That's what happens sometimes with strong founders."

By the summer of 1986 Billye was forced to come to the same conclusion. Capsco's computer system broke down, leaving the company with $600,000 worth of excess inventory and on the brink of disaster. Billye single-handedly cajoled factory reps into letting her return some of the inventory; she salvaged Capsco's relationships with customers, whose orders were shipped either twice or not at all; and time and again, she assuaged the fears of Capsco's panicked bankers. In the process Billye came to a startling realization: she was out there on her own. Her children -- and Capsco's 41 other employees -- were following her directives as they always had: they were not experienced or skilled enough to ease her load significantly. "I don't think they realized what trouble we were in," Billye says. "They had so much confidence in me. I told myself that I was the savior, and it felt kind of good."

"She just wasn't ready to let go," says Flanagan. "We, as a group, came to the conclusion that we had to mentor Billye first." Succession would not be the tidy package she had laid before her children a year earlier.

* * *

The computer failure was just the beginning of Capsco's "dark days." Over the next three years, Billye went through a lengthy and costly divorce that not only drained her emotionally but poisoned her banking relationship. (Her bank was an investor in her husband's company.) Kirk, who was "thrown into operations," grew disenchanted with his long hours, a two-and-a-half-hour commute, and too little time spent with his young family. The industry was going through turbulent changes as well. Prices of electronic components had plunged, squeezing the distributor's already narrow margins and forcing Capsco to reposition itself as a provider of services.

But perhaps most wrenching to Billye was Kathy's decision to leave the company. In 1987 Kathy went back to school to finish her bachelor's degree and then, upon graduation, took a job at another company. "I needed to know more, and I also needed to get out," she says. Billye the mother could not fault her daughter's decision, but Billye the CEO was angry and disappointed to be losing a key manager and her best prospect for a successor.

Billye, worn out and losing hope, started searching for a new president and even considered selling Capsco. "I wanted out," she recalls, "and I knew the kids weren't ready to run the company."

Then, in the spring of 1989, something clicked. "Billye realized she wasn't ready to quit," Flanagan says. "She really did want the company to go to her kids, and she got her head back into the business." With renewed determination to keep Capsco in the family, Billye threw herself into helping Kirk and his wife, Amy, open a Pacific Northwest sales operation. Kirk had all but offered an ultimatum: "I'm either leaving the company or opening up a new territory for Capsco." The board had serious misgivings. "We always tried to flag her when she was mixing up motherhood with running the company," says DeSantis, who, along with his fellow board members, could find little economic justification for expansion at that time. But Billye, who valued the board's advice but frequently ignored it, was adamant. "I didn't want Kirk and Amy to leave the company," she says.

* * *

By the time an older and wiser Kathy returned to Capsco, in 1990, the company was over the hump, and once again Billye's thoughts turned to succession. By then Capsco had been forced onto a new and unfamiliar playing field. It was no longer merely buying and selling electronic components: it was positioning itself as a "materials manager," offering its customers value-added services such as electronic data interface, quality checking, and light assembly -- a change that demanded more sophisticated relationships with suppliers and customers. The board badgered Billye to bring in more-seasoned managers to help grow Capsco, but she resisted. She was dead-set against hiring pricey executives "with a whole agenda of their own." Resigned that Billye would once again do things her way, the board members rolled up their sleeves to help cultivate the next generation. "There were two engines driving the kids' development," says Blakslee. "One was the need to broaden their skills, and the other was Capsco's changed business strategy."

Blakslee worked with Ken, Kathy, and Kirk to draft "position profiles" for each of their jobs and to help them identify the areas where they needed work.

· Kathy needed to hone her financial skills. The plan was for her to take college finance courses and to assume the company's simpler accounting functions. More contact with the company's suppliers and bankers was also part of the plan: Kathy needed to gain their respect and to refine her negotiating skills. Flanagan, whose company was a prototypical Capsco customer, also gave her carte blanche to call on Amdahl's purchasing director for coaching in negotiating high-volume purchase agreements.

· Ken lacked a formal sales system and had trouble motivating his sales force. So Billye hired Ted Steinberg, a "cocky, arrogant, brilliant" (and expensive -- his total fee was between $60,000 and $80,000) sales consultant who worked with Ken for a year and a half. Steinberg recognized that Ken's affability was interfering with his ability to manage his staff effectively. A system would help Ken define the sales process and eliminate much of the subjectivity that often got him into trouble. Later Blakslee helped Ken develop a sales compensation plan that moved Capsco away from a commission-based system. "The salespeople were incentivized to do anything to get one more dollar of product out the door," says Billye. "Partnerships with customers aren't enhanced by that type of selling."

· Kirk's only ally in Sunnyvale was his mother. "Sales weren't happening in Redmond," he says. He was coached to set more aggressive goals, meet his targets, and be more sensitive to how he was handling his relationship with the home office if he wanted support for his expansion venture.

The board also helped spearhead projects that eventually would change the way Capsco conducted business. Flanagan, for example, "lent" Capsco his quality manager to guide the company through the labyrinth of ISO 9002, the European quality-standard certification. "We helped with the fundamentals of running the business," says Blakslee.

* * *

Billye was making headway in preparing Capsco for the next generation, but she was still avoiding concrete decisions about succession. Gut instincts told her that Kathy was the best bet, but her daughter had already left Capsco once -- how much staying power did she really have? Were any of her children truly qualified to take the helm? If Capsco went belly-up, what would happen to her children's future -- not to mention her own retirement? She also wanted to avoid appearing partial. While Kathy was the hands-down favorite among board members, a unilateral declaration that her daughter would succeed her could easily provoke the kind of family friction she had worked so hard to avoid.

Once again Billye sought out an objective set of eyes and ears. Through a longtime business associate, she contacted John Renner, an organizational psychologist specializing in succession. "Billye and the kids presented a classic case of the entrepreneur who had built a business with her bare hands and was really fearful about letting go," says Renner. He was encouraged and impressed, though, by the family's open lines of communication and almost unnatural lack of internal squabbling.

Renner was greeted with a cool reception when he came to Capsco, in August 1991. His objective was to assess each Ericksen's management and leadership potential and, most important, get to the heart of each one's true aspirations. "Initially, everyone thought it was a waste of time," recalls Billye. "It's like reading horoscopes," Kathy thought at the time. And Ken recalls thinking, "This is ridiculous."

Renner was accustomed to such reactions. "People are defensive; that's fairly normal," he says. "And here, it was magnified a bit by the fact that these folks felt that Billye in her characteristic way would impose projects or people -- including me -- upon them."

Renner pressed on, asking the family members, including Billye, to articulate what they as individuals wanted and needed from the company, and encouraging them to confront their own shortcomings. His most effective, and most painful, tool was a "360-degree feedback assessment" -- an anonymous survey distributed to superiors, peers, and subordinates, asking for frank comments about the abilities of each Ericksen. Based on those brutally honest comments, the results of psychological testing, and his interviews, Renner evaluated the kids' management potential and helped each prepare an "action plan for behavior changes." Ken, for example, would have to be more decisive, while Kathy needed to stop overcommitting herself. And Kirk had to communicate more effectively. But the younger Ericksens were only half of the succession equation. "The kids had the capabilities," Renner concluded, "but Billye wasn't allowing them to develop. I tried to make her see what she was doing to hold them back."

So Billye came face-to-face with her demons. "In the psychological evaluation, it turned out that I was such a controlling personality that it's hard for me not to run the show. I wasn't allowing people to grow. John told me if I didn't acknowledge that and do something about it, then I wouldn't have a succession plan."

Taken aback by her domineering presence in a videotape of a staff meeting, Billye stopped attending those meetings and also began to distance herself from factory negotiations, a function she had delegated at least nominally to Kathy. "I would walk by the conference room, and a factory rep would be in there having a meeting with Kathy, and I hadn't been invited," says Billye. "That was very hard at first." Renner also warned her that until her succession plans were on paper, they'd have little credibility.

During Renner's nine-month tenure, Billye had begun talking about "shared governance" -- an equal distribution of power among her children. While she knew that such a plan would be a disaster, she hoped the prospect of a democratically controlled Capsco would raise enough hackles to provoke a discussion of some alternatives. It did. "I thought that would be hell," says Kathy of shared governance. "We'd never get anything done." Ken, Kathy, and Kirk met privately and agreed that Kathy was the best candidate to succeed their mother. Ken, who was happy to remain focused on sales, and Kirk, who wanted to "be the one waving the flag for Capsco to enter new markets," went to their mother on separate occasions and gave Kathy the thumbs-up. With her sons' solid support, Billye set about laying the groundwork for Kathy to succeed her.

* * *

On a shelf behind Billye's desk sits a row of three-ring binders, one of which is labeled "Succession" -- her response to Renner's insistence that she "get it all down on paper." Shortly after their talk in early 1992, Billye read an article detailing the number of succession plans that are made on the way home from the founder's funeral. "I didn't want to be one of those statistics," she says. In her typical "learn it by 9, apply it by noon" fashion, Billye got right to work. She had her certified public accountant do a business valuation, she restructured her life-insurance policy, and she drafted a buy-sell agreement.

With help from the board, she defined the functions of the president and came up with a plan for passing them along to Kathy over a three-year period. (See "Transition Plan," page 5.) Initially, Kathy would be given total responsibility for the functions with which she was most familiar -- information systems, materials management, personnel, and day-to-day accounting tasks. As she became more experienced she'd be given more responsibility and more senior titles.

The transition has not been without glitches. The most dramatic happened shortly after Kathy began managing some of the accounting. Reluctantly, she went to her mother with this message: "We have an inventory build, and we're out of cash." (Capsco had lost a major customer and had not adjusted its orders from factories to account for the loss.) "This time," Kathy says, "I had to go to the bank without Billye and explain." And it was not a minor problem to explain. The excess inventory, in Kathy's words, "had shot all of our ratios," and Capsco was in danger of losing its line of credit. It was up to Kathy to outline a plan of action that would mollify the bankers. She also had to negotiate with factories to take back some of the inventory. It was several months before the company was back on track. In the process, Kathy and her team developed an inventory-control system to prevent recurrences.

"That's one step further than I had gone," Billye says. With her own strong finance background and years of experience running the company by the seat of her pants, she would have known instinctively when she was in danger of an inventory buildup. But her dual goals -- to pass the company on to her children completely by 1995 and to grow Capsco to $20 million by June 1996 -- demanded much more formal guidelines and procedures.

Billye also acknowledged the need for more experienced managers. In August 1992 she and Kathy hired Cliff Videll as manager of information systems and assigned him the task of revamping the company's computer system. Videll says that at first Capsco's employees took everything he said as a suggestion only, "because it wasn't coming from Billye." But Billye promoted Videll's new system as one that was deliberately intended to close her out of the decision-making loop. It demanded, she said, "adherence to procedure rather than the word of the CEO."

Next came Mary Pim, a top-notch manager whom Kathy hired away from a competitor to "be the glue" as she continued to prepare herself for the presidency. Pim didn't take the job offer lightly. "I was told right up front that Billye had announced her retirement," she says. "I was concerned about what would happen when she was gone -- were their bankers still going to support them? What about their customers?" Pim grilled Capsco's customers, factories, and reps. She also talked to employees to be sure they had bought into the succession plan. "Everyone seemed to have tremendous confidence in Kathy," Pim says, "and that was key." She signed on as director of business development in January 1993, with the understanding that she, like Videll, would report directly to Kathy. "The suppliers were surprised," she says. "Some of the reps asked to see my adoption papers!" Billye was in fact stepping out of the limelight.

* * *

It was hardly earth-shattering news when Billye announced last January that Kathy had been promoted to president and chief operating officer. While Kathy was on vacation in Cancun, Billye had systematically removed her own belongings from her office, taking her pictures and mementos down and replacing them with Kathy's. "I was excited," says Kathy. "But I also felt protective of her. It meant she was getting a little closer to the back door."

New family dynamics are already taking shape at Capsco, and though years of planning will certainly help ease the transition, there's still plenty to work out. Ken, for example, now reports directly to Kathy, who has limited experience in the sales-and-marketing field. He, for one, thinks it might have been better for her to be further along the learning curve before taking responsibility for his department. For her part, Kathy thinks that sales and marketing "is an area of the company that could use some new blood. We were in a meeting the other day, and I tried to give Ken an assignment, and we both just started laughing. Finally, I had to say, 'Ken, I'm giving you an assignment. Really."

Billye has also stepped away from the Pacific Northwest operation, demanding that "Ken, Kathy, and Kirk have to own the regional growth of the company, because I refuse to do it." The Redmond operation is now a healthy contributor to the bottom line. But it's safe to assume that decisions to pursue regional expansion -- Kirk's baby -- won't be made so precipitously in the future. Kathy isn't the company mother and admits she is "less concerned with splitting the pie equally" than she is with bottom-line results.

And Billye? "We'll have Star Wars at some point," says Kathy matter-of-factly. "She's a powerful lady." One of the most likely areas of conflict is Capsco's role within the community and the company's workplace policies. Billye, who has known both poverty and the challenges of being a single mother, has made Capsco Santa Clara County's largest per capita contributor to the United Way, and she's well known for her involvement in philanthropic causes. She also instituted a "babies in the workplace" policy at Capsco, allowing parents of newborns to bring their children to work for the first six months. While Kathy has pledged to continue those policies, she is not as emotionally invested in them as her mother is. It's no accident that on Billye's succession time line, she has reserved responsibility for "community relations" for herself through 1995.

Just how long will Billye continue to be involved in Capsco? She's planning a leveraged buyout that will make Kathy the majority shareholder, and she plans to retain some control until she receives "a significant percentage of the buyout price." What's "significant"? She's not saying. By the end of the year, Billye insists, she'll relinquish her office at Capsco and begin functioning solely as a consultant and board member. But her children and Capsco's employees and board members, while acknowledging the great strides she's made in passing the reins, are skeptical.

"I'll show them all," pledges Billye, who has begun seeing a psychologist to help her through the transition. After two and a half sessions, she demanded to know "what we've accomplished here and where we're going with this." The psychologist just laughed and asked Billye if she had ever taken on anything without wanting control, without wanting to win. Succession, after all, was not something she could learn by 9 and apply by noon. But perhaps she could still "win" at it. "She wants us to succeed," says Kathy. "It's a point of pride."

TRANSITION PLAN

Billye Ericksen, with her board's help, set up a three-year transition plan, with major functions moving from her to her daughter, Kathy

July '92 - June '93

July '93 - June '94

July '94 - December '94

January '95

Billye

President, CEO, and chairman of board

Treasury

Quality champion

Training and development

Strategic planning

Information systems

Materials management

Sales

Marketing

Technical support

Accounting

Personnel

President, CEO, and chairman of board

Treasury

Quality champion

Training and development

Strategic planning

Information systems

Materials management

Sales

Marketing

Technical support

Accounting

Personnel

CEO and chairman of board

Treasury

Quality champion

Training and development

Strategic planning

Sales

Marketing

Technical support

Consultant and board member

401(k) and profit-sharing administration

Personnel administration

Apple manager

Chair, quality-improvement-process team

Community relations

Kathy

Vice-president of business development

Product management

Customer service

Business development

Executive vice-president and chief operations officer

Product management

Customer service

Business development

Accounting (2nd qrtr.)

Personnel (2nd qrtr.)

Information systems (2nd qrtr.)

Materials management (2nd qrtr.)

President and chief operating officer

Product management

Customer service

Business development

Accounting

Personnel

Information systems

Materials management

Sales (3rd qrtr.)

Marketing (3rd qrtr.)

Technical support (3rd qrtr.)

Treasury (4th qrtr.)

Quality champion (4th qrtr.)

Training and development (4th qrtr.)

Strategic planning (4th qrtr.)

President, CEO, and chairman of board

Product management

Customer service

Business development

Accounting

Personnel

Information systems

Materials management

Sales

Marketing

Technical support

Treasury

Quality champion

Training and development

Strategic planning

A STRONG-WILLED CEO WHO KNOWS WHEN TO ASK FOR HELP

Billye Ericksen's board of business mentors are Jan Blakslee, president of his own executive-search firm; John DeSantis, director of manufacturing at Capetronic Inc.; Gwen Peterson, vice-president of marketing at Clarity Software; and Bill Flanagan, operations vice-president at Amdahl Corp. When Billye got stuck on succession planning, she called in organizational psychologist John Renner. Once plans were in place for Kathy, Ken, and Kirk, two seasoned managers were hired. They are Cliff Videll, manager of information systems, and Mary Pim, director of business development. Both report to Kathy.